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BREXIT – Five Months On
Dec 12, 2016

By David Chitty, International Accounting & Audit Director

On 23 June 2016, the UK voted in a referendum to leave the European Union (EU). The referendum question did not address the nature of "Brexit." It is simply a direction to government. After five months, what has happened and what is yet likely to happen?
The vote for exit was 52% (about 17 million people), the vote to remain was 48% (about 15 million). The deciding issue appears to have the freedom of movement of people permitted by the EU single market and concerns about the impact of migration upon jobs, earnings and public services. There were significant regional variations, with London, most other large urban centres in England, the nation Scotland and the province of Northern Ireland voting to remain. The majority of older voters supported exit, whilst the majority of younger voters supported remain. These distinct divisions mean that there is a strong feeling of a divided society. There have strong calls for a second Scottish independence referendum. Younger people feel betrayed. The Mayor of London has pledged to fight for London's engagement with the EU.
Following the result, David Cameron resigned as Prime Minister and Leader of the Conservative Party, succeeded by Theresa May. May was nominally a supporter of remain, although she made little effort to actively campaign during the referendum. Two significant appointments in the May government are David Davis, Secretary of State for Exiting the European Union (charged with negotiating the exit) and Liam Fox, Secretary of State for International Trade (charged with negotiating international trade deals for the UK).
To exit the EU, the UK has to invoke Article 50 (of the Lisbon Treaty), opening a two-year process of negotiations, at the end of which the UK will cease to be a member of the EU. May has pledged to invoke Article 50 by March 2017. Theoretically, the UK would then exit in or about March 2019.
"Soft Brexit" vs. "Hard Brexit"
Much of the domestic debate since the referendum has been about the nature of the exit.
"Soft Brexit" means an exit whereby the UK remains a member of, or otherwise closely engaged with the EU single market. Significant sections of the business, financial and professional community want this outcome, as they are concerned about the loss of access to the single market, the loss of "passporting" rights and the imposition of tariffs. Many inward investors would also prefer this outcome, as would the majority of Members of Parliament.
"Hard Brexit" means a complete exit with no access to the single market. The UK would then have to trade under World Trade Organisation terms until it can conclude individual trade deals. David Davis and Liam Fox are seen as preferring this outcome. When May made a speech at the Conservation Party Conference in October in which she appeared to favour Hard Brexit, the currency markets, causing a further devaluation of the Pound, poorly received this.
Current Situation
There has been a lot of posturing, but formal negotiations cannot begin until Article 50 is invoked. Views about the approach to negotiations in the EU vary from seeking an economically sensible solution that keeps the UK closely engaged with the EU and the single market through to punishing the UK for exiting. The "punishment" line comes from countries that fear the potentially growing influence of their own anti-EU factions. In practice, the views of Angela Merkel, Chancellor of Germany, will be most important, but these will depend upon how she performs in next year's German Federal elections.
Pragmatism may prevail as the UK is an important trading partner of EU member states and there is no point in having an outcome that is damaging to all. Following the recent election of Donald Trump as US President, and uncertainties about the new Administration's foreign policy, there are signs that European countries are looking for a united front that includes close association with the UK.
In the UK, a further uncertainty has arisen from the recent decision by the High Court that Parliament should approve the invoking of Article 50. May had contended that government could invoke Article 50 without the consent of Parliament. The appeal hearing in the Supreme Court begun on 4 December, with a judgment expected in January 2017.
Leaked government documents and off the record briefings reveal that the UK government is struggling to find a way forward. There are divisions between ministers as to the direction of policy and unwinding forty years of EU legislation is going to be challenging. Government has neither the resources nor the ability to resolve everything in two years. 
Brexit is a divisive and politically challenging issue. It is still early days and formal negotiations will not begin until Article 50 is invoked. Theresa May has said that "Brexit means Brexit" but it is impossible to predict what the outcome will finally be or even when Brexit will actually take place. For investors and businesses engaging with the UK and the continuing members of the EU, the UK remains a member of the EU and the UK's economic fundamentals remain sound. Uncertainty over the future is something that has to be considered, and it could be sometime before the uncertainty lifts.